CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS REPORT FOR THE YEAR ENDED 31 DECEMBER 2014
CONSOLIDATED FINANCIAL STATEMENTS INDEX Page(s) Independent auditors report 1-2 Consolidated statement of financial position 3-4 Consolidated income statement 5 Consolidated statement of profit or loss and other comprehensive income 6 Consolidated statement of changes in equity 7 Consolidated statement of cash flows 8-9 Notes to the consolidated financial statements 10-49
CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 31 December 2014 31 December 2014 31 December 2013 Note ASSETS Non-current assets Property, plant and equipment 5 5,328,387 5,054,542 Intangible assets and goodwill 6 120,365 126,335 Investments in associates 7 279,678 115,487 Investments in joint ventures 8 2,567,039 703,845 Available-for-sale financial assets 9 485,368 454,146 Finance lease receivables 10 1,637,081 1,775,050 Other non-current assets 11 23,731 42,152 Asset held for sale 12 -- 29,846 10,441,649 8,301,403 Current assets Inventories 13 194,988 275,656 Trade and other receivables 14 551,946 585,434 Finance lease receivables 10 137,969 137,884 Cash and cash equivalents 15 1,622,315 1,725,570 2,507,218 2,724,544 Total assets 12,948,867 11,025,947 The consolidated statement of financial position continues on the next page. The notes on pages 10 to 49 are an integral part of these consolidated financial statements. 3
CONSOLIDATED STATEMENT OF FINANCIAL POSITION (CONTINUED) As at 31 December 2014 4
CONSOLIDATED INCOME STATEMENT As at 31 December 2014 Note Revenue 25 2,988,706 2,903,563 Cost of sales 26 (1,678,580) (1,597,671) Gross profit 1,310,126 1,305,892 Other income 27 161,977 82,583 General and administrative expenses 28 (234,108) (223,676) Operating profit 1,237,995 1,164,799 Finance costs, net 29 (92,093) (151,127) Share of profit of associates 7 28,015 18,993 Share of profit of joint ventures 8 392,593 378,844 Profit 1,566,510 1,411,509 Attributable to: Owners of the Company 1,530,003 1,384,043 Non-controlling interests 36,507 27,466 Total 1,566,510 1,411,509 Earnings per share Basic and diluted earnings per share (expressed in QR) 30 13.91 12.58 5
CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Note Profit 1,566,510 1,411,509 Other comprehensive income: Items that are or may be reclassified to profit or loss Share of loss from associates 7 (54,006) (3,890) Share of (loss)/profit from joint ventures 8 (81,735) 167,137 Net change in fair value on available-for-sale financial assets 9 31,222 51,141 Effective portion of changes in fair value on interest rate swaps for hedging 24 (1,859) 120,560 Other comprehensive income (106,378) 334,948 Total comprehensive income 1,460,132 1,746,457 Attributable to: Owners of the Company 1,423,625 1,708,785 Non-controlling interests 36,507 37,672 1,460,132 1,746,457 The notes on pages 10 to 49 are an integral part of these consolidated financial statements. 6
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY The notes on pages 10 to 49 are an integral part of these consolidated financial statements. 7 Attributable to owners of the Company Share Legal General Noncontrolling capital (Note 16) reserve (Note 17) reserve (Note 18) Hedging reserve Fair value reserve Retained earnings Total interests Total equity Balance at 1 January 2013 1,000,000 500,000 3,241,834 (1,961,126) 233,814 2,152,247 5,166,769 215,402 5,382,171 Total comprehensive income: Profit -- -- -- -- -- 1,384,043 1,384,043 27,466 1,411,509 Other comprehensive income -- -- -- 273,601 51,141 -- 324,742 10,206 334,948 -- -- -- 273,601 51,141 1,384,043 1,708,785 37,672 1,746,457 Transactions with owners of the Company: Dividends relating to year 2012 (Note 31) -- -- -- -- -- (730,000) (730,000) (23,328) (753,328) Contribution to social and sports support fund for 2013 (Note 32) -- -- -- -- -- (34,750) (34,750) -- (34,750) Balance at 31December 2013/ 1 January 2014 1,000,000 500,000 3,241,834 (1,687,525) 284,955 2,771,540 6,110,804 229,746 6,340,550 Total comprehensive income: Profit -- -- -- -- -- 1,530,003 1,530,003 36,507 1,566,510 Other comprehensive income -- -- -- (137,600) 31,222 -- (106,378) -- (106,378) -- -- -- (137,600) 31,222 1,530,003 1,423,625 36,507 1,460,132 Transactions with owners of the Company: Issue of bonus shares 100,000 -- -- -- -- (100,000) -- -- -- Dividends relating to the year 2013 (Note 31) -- -- -- -- -- (750,000) (750,000) (23,330) (773,330) 100,000 -- -- -- -- (850,000) (750,000) (23,330) (773,330) Contribution to social and sports support fund for 2013 (Note 32) -- -- -- -- -- (2,816) (2,816) -- (2,816) Transfer to legal reserve -- 50,000 -- -- -- (50,000) -- -- -- Balance at 31 December 2014 1,100,000 550,000 3,241,834 (1,825,125) 316,177 3,398,727 6,781,613 242,923 7,024,536
CONSOLIDATED STATEMENT OF CASH FLOWS Note CASH FLOWS FROM OPERATING ACTIVITIES Profit 1,566,510 1,411,509 Adjustments for: Depreciation of property, plant and equipment 5 453,065 451,535 Share of profits of associates 7 (28,015) (18,993) Share of profits of joint ventures 8 (392,593) (378,844) Provision for employees end of service benefits 21 5,776 6,349 Deferred income 27 (6,792) (6,792) Dividend income from available-for-sale financial assets 27 (24,756) (21,495) Profit on disposal of property, plant and equipment 27 (316) (15) Profit on disposal of available-for-sale financial assets 27 -- (43,675) Amortization of intangible asset 28 5,970 5,970 Provision for slow moving inventories 28 18,998 20,867 Provision for impairment of asset held for sale 28 29,846 -- Amortization of non-current assets 28 1,710 1,304 Provision for impairment of trade receivables 28 181 -- Interest income 29 (16,162) (20,433) Interest expense 29 105,200 175,029 Bank charges 29 3,251 3,166 1,721,873 1,585,482 Changes in: Trade and other receivables 33,307 (12,986) Inventories 61,670 72,233 Finance lease receivables 137,884 96,648 Trade and other payables (89,361) (219,529) Cash generated from operating activities 1,865,373 1,527,188 Employees end of service benefits paid 21 (846) (2,474) Net cash from operating activities 1,864,527 1,524,714 CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment 5 (727,042) (763,166) Proceeds from disposal of property, plant and equipment 5 445 20 Acquisition of associates 7 (207,262) -- Dividends received from associates 7 17,084 14,211 Dividends received from joint ventures 8 418,665 308,332 Addition to investment in a joint venture 8 (1,971,000) (219,000) Proceeds from sale of available-for-sale financial assets 9 -- 65,028 Net movement in other non-current asset 11 -- (10,935) Dividends from available-for-sale financial assets 27 24,756 21,495 Interest received 16,162 20,433 Net cash used in investing activities (2,428,192) (563,582) 8
CONSOLIDATED STATEMENT OF CASH FLOWS Note CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid to the Company s shareholders 31 (750,000) (730,000) Dividends paid to non-controlling interests (23,329) (23,328) Repayment of subordinated loan from joint venture 11 16,711 181,713 Repayment of loan to related party 22 (100,000) (125,972) Net movements in interest bearing loans and borrowings 19 1,425,479 (1,049,295) Interest paid (105,200) (175,029) Bank charges (3,251) (3,166) Net cash from /(used in) financing activities 460,410 (1,925,077) Net (decrease) in cash and cash equivalents (103,255) (963,945) Cash and cash equivalents at 1 January 1,725,570 2,689,515 Cash and cash equivalents at 31 December 15 1,622,315 1,725,570 The notes on pages 10 to 49 are an integral part of these consolidated financial statements. 9
1. REPORTING ENTITY Qatar Electricity & Water Company Q.S.C. (the Company ) is incorporated in accordance with the provisions of the Qatar Commercial Companies Law No. 5 of 2002 as a Qatari Shareholding Company, and was registered at the Ministry of Economy and Commerce of the State of Qatar with Commercial Registration number 14275 dated 16 March 1992. The Company s registered office is at QIMCO Building, West Bay Corniche Road, Doha, State of Qatar. The Company s shares are listed on the Qatar Stock Exchange since 3 May 1998. The Company s consolidated financial statements comprise the Company and its subsidiaries (collectively referred as the Group and individually as the Group entities ). The principal activity of the Group, which has not changed from the previous year, is the generation of electricity and production of desalinated water. The structure of the Group is as follows: Subsidiaries Name Principal activity Country of incorporation Share holding Ras Laffan Operating Company W.L.L. Ras Laffan Power Company Q.S.C. Joint ventures Name Q Power Q.S.C. (5) Mesaieed Power Company Limited (7) Ras Girtas Power Company Q.S.C. (9) Nebras Power Q.S.C. (10) Associates AES Oasis Limited Name Phoenix Power Company Phoenix Operating Company Generation of electricity & production of desalinated water Qatar 100% Generation of electricity & production of desalinated water Qatar 80% Principal activity Country of incorporation Percentage of holding Generation of electricity & production of desalinated water Qatar 55% Generation of electricity & production of desalinated water Qatar 40% Generation of electricity & production of desalinated water Qatar 45% Invest in electricity and desalinated water projects outside the State of Qatar Qatar 60% Country of Principal activity incorporati on Percentage of holding Generation of electricity & Caymen production of desalinated water Island 38.89% Generation of electricity & production of desalinated water Oman 15% Generation of electricity & production of desalinated water Oman 15% The Company s consolidated financial statements for the year ended 31 December 2014 were authorised for issue by the Board of Directors on 25 January 2015. 10
2. MAJOR TRANSACTIONS AND AGREEMENTS OF THE GROUP Below are the major transactions and agreements of the Group in chronological order: (1) On 10 February 1999 the Company entered into an agreement with the government of the State of Qatar for the purchase of the power plant at Ras Abu Fontas B (RAF B). Based on the agreement the Company was assigned the operation and management of the power plant. (2) In April 2001 the Company entered into a Power Purchase Agreement with the Qatar General Electricity & Water Corporation (hereafter the "KAHRAMAA") for the supply of power from the Company s Ras Abu Fontas B1 (RAF B1) station, which commenced commercial operations on 29 August 2002. (3) In January 2003 the Company purchased the four stations set out below from KAHRAMAA for a total consideration of QR 600 million. A Power and Water Purchase Agreement (hereafter PWPA ) was also signed with KAHRAMAA for its supply of electricity and desalinated water from these stations: Ras Abu Fontas A (RAF A) Al Wajbah Al Saliyah Doha South Super Article 6 of the PWPA stipulates that the agreement is conditional and shall not become effective, unless an Emiri decree granting the Company a concession to use the land on which the plants are located is promulgated and is in full force and effect. Article 6.2 of the PWPA also states that in the event the Emiri decree is not granted by 1 June 2003 the parties shall meet to discuss and agree a solution and to the extent necessary, the said agreement shall be amended to reflect any such solution needed. As at the reporting period, the Emiri decree was not issued. The revenues from the above stations accounted for 20.4% of the total revenue of the Group for the year ended 31 December 2014 (2013: 20.61%). This percentage excludes revenue from Al Wajbah station because this station is held for sale as stated in Note 12. No amendments have been made to the PWPA since both parties are in continuing discussions. The Company is confident that the Emiri decree will be issued in the foreseeable future. (4) In January 2003 the Company purchased from Qatar Petroleum the Dukhan Desalination Plant for QR 71.66 million. Subsequent to concluding this purchase agreement, the Company also concluded the following agreements with Qatar Petroleum relating to the Dukhan Desalination Plant: Land Lease Agreement Water Purchase Agreement Fuel Supply Agreement (5) In year 2004 the Company entered into a joint venture with International Power Plc and Chubu Electric Power Company for the Ras Laffan B Integrated Water and Power Plant project. A jointly controlled entity named Q Power Q.S.C. was incorporated in January 2005 for executing this project. The joint venture ownership is as follows: Qatar Electricity & Water Company Q.S.C. (55%) International Power Plc (40%) Chubu Electric Power Company (5%) (6) In October 2005 the Company entered into a PWPA with KAHRAMAA for the supply of electricity and desalinated water from the Company s Ras Abu Fontas B2 (RAF B2) station. Subsequently to this PWPA, the Company entered into an engineering, procurement and construction contract with General Electric International, a company incorporated under the laws of Delaware, and Fisia Italimpianti S.P.A, a company incorporated in Italy, for the construction of the RAF B2 project. 11
2. MAJOR TRANSACTIONS AND AGREEMENTS OF THE GROUP (7) In December 2006 the Company entered into a joint venture with Marubeni Corporation and Qatar Petroleum for the Mesaieed power project. A jointly controlled entity named Mesaieed Power Company Q.S.C. was incorporated on 15 January 2007 for executing this project. The agreement was amended in May 2009 following the addition of Chubu Electric Power Company to the joint venture. The current owners of the joint venture are as follows: Qatar Electricity & Water Company Q.S.C. (40%) Marubeni Corporation (30%) Qatar Petroleum (20%) Chubu Electric Power Company ( 10%) (8) In May 2007 the Company entered into a Water Purchase Agreement with KAHRAMAA for the supply of desalinated water from the Company s Ras Abu Fontas A1 (RAF A1) station (an extension of RAF A). Subsequently to this agreement, the Company also entered into an engineering procurement and construction contract agreement with Fisia Italimpianti S.P.A, a company incorporated in Italy, for the construction of the RAF A1 project. (9) In March 2008 the Company entered into a joint venture with RLC Power Holding Company and Qatar Petroleum for the Ras Laffan C Project. A jointly controlled entity named Ras Girtas Power Company Q.S.C. was incorporated on 25 March 2008 for executing this project. The joint venture ownership is as follows: Qatar Electricity & Water Company Q.S.C. ( 45%) RLC Power Holding Company ( 40%) Qatar Petroleum (15%) (10) In year 2013 the Company entered into an agreement with Qatar Petroleum International Limited Q.S.C. and Qatar Holding L.L.C. to establish a joint venture under the name of Nebras Power Q.S.C. to develop and acquire power and water projects and related fuel sourcing and loading and unloading facilities outside Qatar. The percentage shareholding in Nebras Power Q.S.C. are as follows; Qatar Electricity & Water Company Q.S.C. (60%) Qatar Petroleum International Limited Q.S.C. (20%) Qatar Holding L.L.C. (20%) 3. BASIS OF PREPARATION a) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs). b) Basis of measurement These consolidated financial statements have been prepared under the historical cost conversion, as modified by the revaluation of the available-for-sale financial assets and the interest rate swaps for hedging. c) Functional and presentation currency Items included in the financial statements of each of the Group's entities are measured using the currency of the primary economic environment in which the entity operates (the functional currency"). For both the subsidiaries of the Company, which are operating in the State of Qatar, the Qatari Riyal is the functional currency. The consolidated financial statements are presented in Qatari Riyals which is the Company's functional and the Group's presentation currency. 12
3. BASIS OF PREPARATION (CONTINUED) d) Use of estimates and judgments In preparing these consolidated financial statements, the management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies that have the most significant effect on the amounts recognized in the consolidated financial statements are described as follows: Impairment of trade and other receivables Management establishes an allowance for impairment that represents its estimate of incurred losses in respect of trade and other receivables. The main components of this allowance are a specific loss component that relates to individually significant exposures, and a collective loss component established for groups of similar assets in respect of losses that have been incurred but not yet identified. The collective loss allowance is determined based on historical data of payment statistics for similar financial assets. Useful lives, residual values and related depreciation charges of property, plant and equipment Management determines the estimated useful lives of its property, plant and equipment to calculate depreciation. This estimate is determined after considering the expected usage of the asset or physical wear and tear. Management reviews the residual value and useful lives annually. Future depreciation charge would be adjusted where the management believes the useful lives differ from previous estimates. Impairment of inventories Inventories are held at the lower of cost or net realizable value. When inventories become old or obsolete, an estimate is made of their net realizable value. For individually significant amounts this estimation is performed on an individual basis. Amounts which are not individually significant, but which are old or obsolete, are assessed collectively and a provision applied according to the inventory type and the degree of ageing or obsolescence, based on historical selling prices. Impairment of available-for-sale financial assets For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost. e) Standards, amendments and interpretations effective on or after 1 January 2014 During the current year, the Group adopted all the below new and revised International Financial Reporting Standards that are relevant to its operations and are effective as of 1 January 2014. There was no material effect on the accounting policies of the Group as a result of their adoption and their was no significant impact on the financial statements of the Group. Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of currently has a legally enforceable right of set-off and simultaneous realization and settlement. The amendments have been applied retrospectively. 13
3. BASIS OF PREPARATION (CONTINUED) e) Standards, amendments and interpretations effective on or after 1 January 2014 (continued) Amendments to IFRS 10, IFRS 12 and IAS 27 on investment entities The amendments to IFRS 10 define an investment entity and require a reporting entity that meets the definition of an investment entity not to consolidate its subsidiaries but instead to measure its subsidiaries at fair value through profit or loss in its consolidated and separate financial statements. Consequential amendments have been made to IFRS 12 and IAS 27 to introduce new disclosure requirements for investment entities. Amendments to IAS 36 Recoverable Amount Disclosures for Non-Financial Assets The amendments to IAS 36 remove the requirement to disclose the recoverable amount of a cash-generating unit (CGU) to which goodwill or other intangible assets with indefinite useful lives had been allocated when there has been no impairment or reversal of impairment of the related CGU. Furthermore, the amendments introduce additional disclosure requirements applicable to when the recoverable amount of an asset or a CGU is measured at fair value less costs of disposal. These new disclosures include the fair value hierarchy, key assumptions and valuation techniques used which are in line with the disclosure required by IFRS 13 Fair Value Measurements. IFRIC 21 Levies IFRIC 21 (amendments to IAS 32) provide guidance on the accounting for levies in the financial statements of the entity that is paying the levy. f) Standards, amendments and interpretations issued but not yet effective A number of new standards, amendments to standards and interpretations are effective for annual periods beginning on or after 1 January 2015. None of these has been applied in preparing these consolidated financial statements. Those which are relevant to the Group are set out below. The Group does not expect any significant impact on its accounting policies from their adoption and does not plan to early adopt these standards. IFRS 9 Financial Instruments IFRS 9 published in July 2014, replaces the existing IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognized. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programs. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2017, with early adoption permitted. 14
3. BASIS OF PREPARATION (CONTINUED) f) Standards, amendments and interpretations issued but not yet effective Amendments to IAS 16 and IAS 38 clarification of acceptable methods of depreciation and amortization The amendments to IAS 16 prohibits entities from using a revenue based depreciation method for items of property, plant and equipment. The amendments to IAS 38 introduce a rebuttable presumption that revenue is not an appropriate basis for amortization of an intangible asset. This presumption can only be rebutted if the intangible asset is expressed as a measure of revenue or when it can be demonstrated that revenue and consumption of the economic benefits of the intangible asset are highly correlated. The amendments apply prospectively for annual periods beginning on or after 1 January 2016. Amendments to IAS 19 Defined Benefit Plans: Employee Contributions The amendments to IAS 19 clarify how an entity should account for contributions made by employees or third parties to define benefit plans, based on whether those contributions are dependent on the number of years of service provided by the employee. For contributions that are independent of the number of years of service, the entity may either recognize the contributions as a reduction in the service cost in the period in which the related service is rendered, or to attribute them to the employees periods of service using the project unit credit method; whereas for contributions that are dependent on the number of years of service, the entity is required to attribute them to the employees periods of service. Annual improvements to IFRSs 2010-2012 cycle and 2011-2013 cycle The annual improvements to IFRSs to 2010-2012 and 2011-2013 cycles include a number of amendments to various IFRSs. Most amendments will apply prospectively for annual periods beginning on or after 1 July 2014; earlier application is permitted (along with the special transitional requirement in each case) in which case the related consequential amendments to other IFRSs would also apply. 4. SIGNIFICANT ACCOUNTING POLICIES The principal accounting policies applied in the preparation of these consolidated financial statements are set out below. These policies have been applied consistently to all years presented in these consolidated financial statements. a) Basis of consolidation Business combinations The Group accounts for business combinations using the acquisition method when control is transferred to the Group (see Subsidiaries below). The consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment. Any gain on a bargain purchase is recognized in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities. The consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognized in profit or loss. Any contingent consideration is measured at fair value at the date of acquisition. If an obligation to pay contingent consideration that meets the definition of a financial instrument is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. 15
4. SIGNIFICANT ACCOUNTING POLICIES a) Basis of consolidation (continued) Subsidiaries Subsidiaries are entities controlled by the Group. The Group controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity. The financial statements of subsidiaries are included in the consolidated financial statements from the date on which control commences until the date on which control ceases. Non-controlling interests Non-controlling interestsare measured at their proportionate share of the acquiree s identifiable net assets at the date of acquisition. Changes in the Group s interest in a subsidiary that do not result in a loss of control are accounted for as equity transactions. Loss of control When the Group loses control over a subsidiary, it derecognizes the assets and liabilities of the subsidiary, and any related non-controlling interest and other components of equity. Any resulting gain or loss is recognized in profit or loss. Any interest retained in the former subsidiary is measured at fair value when control is lost. Interest in equity-accounted investees The Group s interests in equity-accounted investees comprise interests in associates and joint ventures. Associates are those entities in which the Group has significant influence, but not control or joint control, over the financial and operating policies. A joint venture is an arrangement in which the Group has joint control, whereby the Group has rights to the net assets of the arrangement, rather than rights to its assets and obligations for its liabilities. Interests in associates and the joint ventures are accounted for using the equity method. They are initially recognized initially at cost, which includes transaction costs. Subsequent to initial recognition, the consolidated financial statements include the Group s share of the profit or loss and other comprehensive income of equity accounted investees, until the date on which significant influence or joint control ceases. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated. Unrealized gains arising from transactions with equity accounted investees are eliminated against the investment to the extent of the Group s interest in the investee. Unrealized losses are eliminated in the same way as unrealized gains, but only to the extent that there is no evidence of impairment. b) Property, plant and equipment Recognition and measurement Items of property, plant and equipment are measured at cost less accumulated depreciation and any accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition or construction of an asset. Purchased software that is integral to the functionality of the related equipment is capitalised as part of that equipment. The costs of initial spare parts included under capital spares received for the maintenance of the three gas turbine-generators at RAF B2 are capitalised. 16
4. SIGNIFICANT ACCOUNTING POLICIES b) Property, plant and equipment (continued) If significant parts of an item of property, plant and equipment have different useful lives, then they are accounted for as separate items (major components) of property, plant and equipment. An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Profit on disposal of an item of property, plant and equipment are determined by comparing the proceeds from its disposal with its carrying amount, and recognised net within profit or loss. Subsequent expenditure The cost of renovations or replacement of a component of an item of property, plant and equipment is included in the carrying amount of the asset or recognised as a separate asset, as appropriate only when it is possible that the future economic benefits associated with the asset will flow to the Group, and its cost can be measured reliably. The carrying amount of the replaced component is derecognised. The costs of day-today servicing of property, plant and equipment are recognised in profit or loss as incurred. Depreciation Depreciation is calculated to write off the cost of items of property, plant and equipment less their estimated residual values using the straight-line method over their estimated useful lives, and is recognised in profit or loss. The estimated useful lives of the property, plant and equipment in the current and comparative periods are as follows: Production facilities: Ras Abu Fontas B (RAF B) Ras Abu Fontas B1 (RAF B1) Ras Abu Fontas A (RAF A) Ras Abu Fontas A1 (RAF A1) Al Wajbah (1) Al Saliyah Doha South Super Dukhan Desalination Plant Ras Abu Fontas B2 (RAF B2) Furniture, fixtures and office equipment Motor vehicles C inspection costs 17.75 years 20 years 12 years 25 years 12 years 12 years 12 years 25 years 25 years 3-7 years 4 years 3-5 years (1) The Company discontinued the operations of its Al-Wajbah power production during 2010 following instructions received from the government of the State of Qatar. Capital work in progress is not depreciated. Once completed these assets are re-classified to the appropriate category of property, plant and equipment and depreciated accordingly. Land is not depreciated. Depreciation methods, residual values and useful lives are reviewed at each reporting date and adjusted if appropriate. 17
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) c) Intangible assets and goodwill Recognition and measurement Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Other intangible assets comprise the Power and Water purchase agreements (PWPA) that are acquired by the Group and have finite useful lives are measured at cost less accumulated amortization and any accumulated impairment losses. Subsequent expenditure Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the specific asset to which it relates. All other expenditure, including expenditure on internally generated goodwill and brands, is recognized in profit or loss as incurred. Amortization Amortization is calculated to write off the cost of intangible assets less their estimated residual values using the straight-line method over their estimated useful lives, and is recognized in profit or loss. Goodwill is not amortized. The estimated useful life of the Power and Water Purchase Agreement is 25 years. Amortization methods, useful lives and residual values are reviewed at each reporting date and adjusted if appropriate. d) Financial instruments The Group classified its non-derivative financial assets into the following categories: loans and receivables and available-for-sale financial assets. The Group classifies its non-derivative financial liabilities into the other financial liabilities category. Non-derivative financial assets and financial liabilities recognition and derecognition The Group initially recognizes loans and receivables (loan receivable and trade and other receivables) on the date when they are originated. All other financial assets (bank balances, available-for-sale financial assets) and financial liabilities (loans payables and trade and other payables) are initially recognized on the trade date. The Group derecognizes a financial asset when the contractual rights to the cash flows from the asset expire, or it transfers the rights to receive the contractual cash flows in a transaction in which substantially all of the risks and rewards of ownership of the financial asset are transferred, or it neither transfers nor retains substantially all of the risks and rewards of ownership and does not retain control over the transferred asset. Any interest in such derecognized financial assets that is created or retained by the Group is recognized as a separate asset or liability. 18
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) d) Financial instruments (continued) Non-derivative financial assets and financial liabilities recognition and derecognition (continued) The Group derecognizes a financial liability when its contractual obligations are discharged or cancelled, or expire. Financial assets and financial liabilities are offset and the net amount presented in the consolidated statement of financial position when, and only when, the Group has a legal right to offset the amounts and intends either to settle them on a net basis or to realize the asset and settle the liability simultaneously. Non-derivative financial assets measurement Loans and receivables These assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at amortized cost using effective interest method. Available-for-sale financial assets These assets are initially recognized at fair value plus any directly attributable transaction costs. Subsequent to initial recognition, they are measured at fair value and changes therein, other than impairment losses, are recognized in OCI and accumulated in the available-for-sale financial asset fair value reserve. When these assets are derecognized, the gain or loss accumulated in equity is reclassified to profit or loss. Non-derivative financial liabilities measurement Non-derivative financial liabilities are initially recognized at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortized cost using the effective interest method. Derivative financial instruments and hedge accounting The Group holds derivative financial instruments to hedge its interest rate risk exposures. Derivatives are recognized initially at fair value; any directly attributable transaction costs are recognized in profit or loss as they are incurred. Subsequent to initial recognition, derivatives are measured at fair value. When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognized in other comprehensive income and accumulated in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognized immediately in profit or loss. The amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the amount accumulated in equity is reclassified to profit or loss. 19
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e) Impairment Non-derivative financial assets Financial assets, including an interest in an equity accounted investee, are assessed at each reporting date to determine whether there is objective evidence of impairment. Objective evidence that financial assets are impaired includes: default or delinquency by a debtor; restructuring of an amount due to the Group on terms that the Group would not consider otherwise; indications that a debtor or issuer will enter bankruptcy; adverse changes in the payment status of borrowers or issuers; the disappearance of an active market for a security; or observable data indicating that there is measurable decrease in expected cash flows from a group of financial assets. For an investment in an equity security, objective evidence of impairment includes a significant or prolonged decline in its fair value below its cost. Financial assets measured at amortized cost The Group considers evidence of impairment for these assets at both an individual asset and a collective level. All individually significant assets are individually assessed for impairment. Those found not to be impaired are then collectively assessed for any impairment that has been incurred but not yet individually identified. Assets that are not individually significant are collectively assessed for impairment. Collective assessment is carried out by grouping together assets with similar risk characteristics. In assessing collective impairment, the Group uses historical information on the timing of recoveries and the amount of loss incurred, and makes an adjustment if current economic and credit conditions are such that the actual losses are likely to be greater or lesser than suggested by historical trends. An impairment loss is calculated as the difference between an asset s carrying amount and the present value of the estimated future cash flows discounted at the asset s original effective interest rate. Losses are recognized in profit or loss and reflected in an allowance account. When the Group considers that there are no realistic prospects of recovery of the asset, the relevant amounts are written off. If the amount of impairment loss subsequently decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, then the previously recognized impairment loss is reversed through profit or loss. Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognized by reclassifying the losses accumulated in the fair value reserve to profit or loss. The amount reclassified is the difference between the acquisition cost (net of any principal repayment and amortization) and the current fair value, less any impairment loss previously recognized in profit or loss. If the fair value of an impaired available-for-sale financial assets subsequently increases and the increase can be related objectively to an event occurring after the impairment loss was recognized, then the impairment loss is reversed through profit or loss; otherwise, it is reversed through other comprehensive income 20
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) e) Impairment (continued) Non-derivative financial assets (continued) Equity-accounted investees An impairment loss in respect of an equity-accounted investee is measured by comparing the recoverable amount of the investment with its carrying amount. An impairment loss is recognized in profit or loss, and is reversed if there has been a favourable change in the estimates used to determine the recoverable amount. Non-financial assets At each reporting date, the Group reviews the carrying amounts of its non-financial assets other than inventories to determine whether there is any indication of impairment. If any such indication exists, then the asset s recoverable amount is estimated. Goodwill is tested annually for impairment. For impairment testing, assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or CGUs. Goodwill arising from a business combination is allocated to CGUs or groups of CGUs that are expected to benefit from the synergies of the combination. The recoverable amount of an asset or CGU is the greater of its value in use and its fair value less costs to sell. Value in use is based on the estimated future cash flows, discounted to their present value using a pretax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its recoverable amount. Impairment losses are recognised in profit or loss. They are allocated first to reduce the carrying amount of any goodwill allocated to the CGU, and then to reduce the carrying amounts of the other assets in the CGU on a pro rata basis. An impairment loss in respect of goodwill is not reversed. For other assets, an impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. f) Leases Determining whether an arrangement contains a lease At inception of an arrangement, the Group determines whether the arrangement is or contains a lease. At inception or on reassessment of an arrangement that contains a lease, the Group separates payments and other consideration required by the arrangement into those for the lease and those for other elements on the basis of their relative fair values. If the Group concludes for a finance lease that it is impracticable to separate the payments reliably, then an asset and a liability are recognised at an amount equal to the fair value of the underlying asset; subsequently, the liability is reduced as payments are made and an imputed finance cost on the liability is recognized using the Group s incremental borrowing rate. 21
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) f) Leases (continued) Leased assets Assets held by the Group under leases that transfer to the Group substantially all of the risks and rewards of ownership are classified as finance leases. The leased assets are measured initially at an amount equal to the lower of their fair value and the present value of the minimum lease payments. Subsequent to initial recognition, the assets are accounted for in accordance with the accounting policy applicable to that asset. Assets held under other leases are classified as operating leases and are not recognized in the Group s statement of financial position. Lease payments Payments made under operating leases are recognized in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognized as an integral part of the total lease expense, over the term of the lease. Minimum lease payments made under finance leases are apportioned between the finance expense and the reduction of the outstanding liability. The finance expense is allocated to each period during the lease term so as to produce a constant periodic rate of interest on the remaining balance of the liability. g) Assets held for sale Non-current assets, or disposal groups comprising assets and liabilities, are classified as held-for-sale if it is highly probable that they will be recovered primarily through sale rather than through continuing use. Such assets, or disposal groups, are generally measured at the lower of their carrying amount and fair value less costs to sell. Any impairment loss on a disposal group is allocated first to goodwill, and then to the remaining assets and liabilities on a pro rata basis, except that no loss is allocated to inventories, financial assets, deferred tax assets, employee benefit assets, investment property or biological assets, which continue to be measured in accordance with the Group s other accounting policies. Impairment losses on initial classification as held-for-sale or held-fordistribution and subsequent gains and losses on remeasurement are recognized in profit or loss. Once classified as held-for-sale, intangible assets and property, plant and equipment are no longer amortized or depreciated, and any equity-accounted investee is no longer equity accounted. h) Inventories Inventories are measured at the lower of cost and net realisable value. The costs comprises those expenses incurred in bringing each inventory item to its present location and condition, and for spare parts, chemicals and consumables it is based on the weighted average cost principle. Net realisable value represents the estimated selling price for inventories less any costs necessary to dispose them. i) Provisions Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation 22
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) j) Employees end of service benefits The Group provides end of service benefits to its expatriate employees. The entitlement to these benefits is based upon the employees final salary and length of service, subject to the completion of a minimum service period. The expected costs of these benefits are accrued over the period of employment. With respect to its national employees, the Group makes contributions to the General Pension Fund Authority calculated as a percentage of the employees salaries. The Company s obligations are limited to these contributions, which are expensed when due. k) Pension and Provident Fund plan-defined contribution plan Under the Qatar Law No. 24 of 2002 on Retirement and Pension, the Group is required to make contributions to a fund scheme set by the government of the State of Qatar for Qatari employees. The contribution is calculated as a percentage of the Qatari employees salaries. The Group s obligations are limited to these contributions, which are expensed when due. l) Discontinued operations A discontinued operation is a component of the Group s business, the operations and cash flows of which can be clearly distinguished from the rest of the Group and which: represents a separate major line of business or geographical area of operations; is part of a single co-ordinated plan to dispose of a separate major line of business or geographical area of operations; or is a subsidiary acquired exclusively with a view to re-sale. Classification as a discontinued operation occurs at the earlier of disposal or when the operation meets the criteria to be classified as held-for-sale. When an operation is classified as a discontinued operation, the comparative statement of profit or loss and other comprehensive income is re-presented as if the operation had been discontinued from the start of the comparative year. m) Revenue recognition Revenue is measured at fair value of the consideration received or receivable and represents amounts receivable for the sale of goods and services in the ordinary course of the Group's activities, net of returns and discounts. The Group recognises revenue when the amount of revenue can be reliably measured, when it is probable that future economic benefits will flow to the entity and when specific criteria have been met for each of the Group s activities as described below. Revenues earned by the Group are recognised on the following bases: 23
4. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) m) Revenue recognition Sale of electricity and desalinated water Sales of electricity and water are recognised as revenue as per the terms of the respective agreements, described as follows: Sales from RAF B are accounted for based on the mechanism agreed between KAHRAMAA and the Company in respect of the agreement approved on 1 June 2000. Sales from RAF B1 are accounted for on the basis of the tariff formula set out in the Power Purchase Agreement with KAHRAMAA. Sales from RAF A, Al Saliyah and Doha South Super are accounted for as per the terms of the Power and Water Purchase Agreement with KAHRAMAA. Sales from RAF A1 are accounted for as per the terms of the Water Purchase Agreement with KAHRAMAA. Sales from Dukhan Desalination Plant are accounted for in accordance with the Water Purchase Agreement signed with Qatar Petroleum. Sales from RAF B2 are accounted for as per the terms of the Power and Water Purchase Agreement with KAHRAMAA. Dividend income Dividend income from investments is recognized when the shareholder's right to receive payment has been established. Interest income Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset's net carrying amount on initial recognition. n) Share capital Ordinary shares are classified as equity. o) Dividend distribution to the Company s shareholders Dividend distribution to the Company s shareholders is recognised as a liability in the Company s consolidated financial statements in the year in which the dividends are approved by the Company s shareholders. 24